Press Release

 
Stepan Reports Second Quarter and Record First Half Earnings

NORTHFIELD, Ill., July 26, 2017 /PRNewswire/ -- Stepan Company (NYSE: SCL) today reported:

Second Quarter Highlights

  • Reported net income was $27.9 million, or $1.19 per diluted share versus $28.5 million, or $1.24 per diluted share, in the prior year. Adjusted net income* was $30.9 million, or $1.32 per diluted share versus $30.7 million, or $1.33 per diluted share, in the prior year.
  • Surfactants operating income was $31.0 million versus $27.2 million in the prior year. The increase was primarily attributable to higher demand for Functional Products, strength in Household, Industrial and Institutional end markets and lower manufacturing costs, mostly from prior plant closures in Canada and Brazil. Overall Surfactants sales volume declined 3% from the prior year primarily due to lower commodity surfactant demand.
  • Polymer operating income was $21.3 million versus $31.0 million in the prior year. This decrease was mostly attributable to higher raw material costs and lower sales volumes. Overall Polymer sales volume declined 7% from the prior year with polyol volumes down 5%.
  • Specialty Product operating income was $5.4 million versus $1.8 million in the prior year, primarily due to order timing differences within the flavor business and higher unit margins across the business.
  • Announced intent to acquire a surfactant plant and a portion of the associated business in Mexico.
  • Net-debt ratio declined 500 basis points to 10%.

First Half Highlights

  • Reported net income was a record $59.8 million, or $2.56 per diluted share, a 6% increase versus $56.4 million, or $2.46 per diluted share, in the prior year.
  • Adjusted net income* was a record $62.6 million, or $2.68 per diluted share, a 4% increase versus $60.4 million, or $2.63 per diluted share, in the prior year. Total Company sales volume declined 4% compared to the first half of 2016.

"The second quarter adjusted net income exceeded prior year as the Company continued to benefit from our diversification strategy, increased productivity and improved margins within our Surfactants and Specialty businesses. Rising raw material costs and increased competitive pressure contributed to a disappointing quarter for our Polymer business. The global market for rigid polyols continues to be strong," said F. Quinn Stepan, Jr., Chairman, President and Chief Executive Officer. "

*   Adjusted net income is a non-GAAP measure which excludes Deferred Compensation income/ expense as well as other significant and infrequent/non-recurring items. See Table II for a reconciliation of non-GAAP adjusted net income and adjusted earnings per diluted share.

Financial Summary








Three Months Ended
June 30



Six Months Ended

June 30


($ in thousands, except per share data)

2017



2016



%

Change



2017



2016



%

Change


Net Sales

$

495,101



$

454,603




9

%


$

963,370



$

900,500




7

%

Operating Income

$

38,961



$

42,916




(9)%



$

85,020



$

87,523




(3)%


Net Income

$

27,882



$

28,496




(2)%



$

59,795



$

56,412




6

%

Earnings per Diluted Share

$

1.19



$

1.24




(4)%



$

2.56



$

2.46




4

%

























Adjusted Net Income *

$

30,893



$

30,711




1

%


$

62,594



$

60,448




4

%

Adjusted Earnings per Diluted Share *

$

1.32



$

1.33




(1)%



$

2.68



$

2.63




2

%



* See Table II for reconciliations of non-GAAP adjusted net income and earnings per diluted share.


Summary of Second Quarter Adjusted Net Income Items

Adjusted net income excludes non-operational deferred compensation income/expense as well as certain other significant and infrequent or non-recurring items.

  • Deferred Compensation: The current year second quarter includes $2.5 million of after-tax expense versus $1.4 million of after-tax expense in the prior year.
  • Business Restructuring: The current year second quarter includes $0.3 million of after-tax decommissioning expense related to the Canadian plant closure announced in 2016 and $0.2 million of after-tax severance expense attributable to cost reduction efforts at our Singapore plant. The prior year quarter includes $0.8 million of after-tax severance expense related to our Canadian plant closure.

Percentage Change in Net Sales

The 9% increase in quarterly net sales was primarily due to higher selling prices, which were attributable to the pass-through of certain higher raw material costs.  These higher selling prices were partially offset by a 4% decline in sales volume and the negative impact of foreign currency translation.



Three Months Ended

June 30, 2017



Six Months Ended

June 30, 2017


Volume



(4)

%



(4)

%

Selling Price



14

%



12

%

Foreign Translation



(1)

%



(1)

%

Total



9

%



7

%

Segment Results



Three Months Ended

June 30



Six Months Ended

June 30


($ in thousands)


2017



2016



%

Change



2017



2016



%

Change


Net Sales

























Surfactants


$

329,334



$

298,587




10

%


$

651,937



$

608,547




7

%

Polymers


$

141,187



$

134,498




5

%


$

267,797



$

248,396




8

%

Specialty Products


$

24,580



$

21,518




14

%


$

43,636



$

43,557




0

%

Total Net Sales


$

495,101



$

454,603




9

%


$

963,370



$

900,500




7

%

 



Three Months Ended

June 30



Six Months Ended

June 30


($ in thousands)


2017



2016



%

Change



2017



2016



%

Change


Operating Income *

























Surfactants


$

31,030



$

27,232




14

%


$

69,267



$

64,477




7

%

Polymers


$

21,257



$

30,994




(31)

%


$

42,656



$

53,191




(20)

%

Specialty Products


$

5,439



$

1,788




204

%


$

6,714



$

4,121




63

%

Total segment operating income declined $2.3 million, or 4%, versus the prior year quarter. Total segment operating income in the first half declined $3.2 million, or 3%, versus the prior year.

  • Surfactant net sales were $329.3 million for the quarter, a 10% increase versus the prior year. Selling prices increased 15% compared to the prior year quarter primarily due to the pass-through of certain higher raw material costs. Sales volume declined 3%, mostly due to lower Consumer Product commodity volumes in North America and Europe, partially offset by growth in Functional Products and Household, Industrial and Institutional end markets. The translation impact of a stronger U.S. dollar decreased net sales by 2%. Surfactant operating income increased $3.8 million versus the prior year, primarily driven by improved product mix, lower manufacturing costs attributable to prior plant closures in Canada and Brazil and positive contributions from our previous acquisitions of Tebras Tensoativos do Brazil Ltda. and from PBC Industria Quimica Ltda. in Brazil.
  • Polymer net sales were $141.2 million for the quarter, a 5% increase versus prior year. Selling prices increased 12% in the quarter, partially offsetting higher raw material costs. Sales volume declined 7% compared to the prior year quarter, primarily due to lower Phthalic Anhydride (PA) and global Rigid Polyol volumes, partially offset by higher Specialty Polyol volume. PA volume declined 16% primarily due to non-recurring sales to a co-producer. North America and Europe Polyol volume declined 4% due to the pull-forward of North American volume into the first quarter of 2017, lost share at one customer in North America and MDI shortages in Europe. Despite the decline, the global rigid polyol market remains strong. Operating income decreased $9.7 million versus the prior year quarter, attributable to higher raw material costs and lower sales volumes during the quarter.
  • Specialty Products net sales were $24.6 million, a $3.1 million increase versus the prior year. Operating income increased $3.7 million versus the prior year quarter. The quarterly improvement reflects higher sales volume due to the timing of orders in our flavor business and higher unit margins across the business.

Corporate Expenses



Three Months Ended

June 30



Six Months Ended

June 30


($ in thousands)


2017



2016



%

Change



2017



2016



%

Change


Total  -  Corporate Expenses


$

18,765



$

17,098




10

%


$

33,617



$

34,266




(2)

%

Deferred Compensation Expense/(Income) *


$

5,016



$

2,434




106

%


$

5,392



$

5,154




5

%

Business Restructuring Expense


$

586



$

1,061




(45)

%


$

1,372



$

1,061




29

%

Adjusted Corporate Expense


$

13,163



$

13,603




(3)

%


$

26,853



$

28,051




(4)

%

 

* See Table III for a discussion of deferred compensation plan accounting.

 

  • Corporate expenses, excluding deferred compensation and business restructuring expense, decreased $0.4 million, or 3%, for the quarter. Corporate expenses declined $1.2 million, or 4%, for the first six months.

Income Taxes

The effective tax rate was 27% for the first half of 2017 versus 29% for the first half of 2016.  The decrease was primarily attributable to higher excess tax benefits derived from stock based compensation awards exercised or distributed in the first half of 2017 versus 2016 and an unfavorable foreign tax audit settlement recorded in 2016 that did not recur in 2017.   

Selected Balance Sheet Information

The Company's net debt level decreased $38 million for the quarter while the net debt ratio dropped from 15% to 10%, mainly attributable to a $26 million increase in cash.    

 

 ($ in millions)

6/30/17



3/31/17



12/31/16


Net Debt












Total Debt

$

304.4



$

316.7



$

317.0


Cash


223.8




197.8




225.7


Net Debt

$

80.6



$

118.9



$

91.3


Equity


707.3




673.2




634.6


Net Debt + Equity

$

788.0



$

792.1



$

725.9


Net Debt / (Net Debt + Equity)


10

%



15

%



13

%

The major working capital components were:

 ($ in millions)

6/30/17



3/31/17



12/31/16


Net Receivables

$

306.2



$

287.5



$

263.4


Inventories


178.4




189.8




173.7


Accounts Payable


(169.2)




(163.8)




(158.3)



$

315.4



$

313.5



$

278.8


The Company had capital expenditures of $18 million during the quarter and $38 million during the first half of 2017.  This compares to $22 million and $41 million, respectively, in the prior year.  For the full year, capital expenditures are expected to be between $95 and $105 million.

Outlook

"After achieving record first half net income, we remain optimistic about the balance of the year. We believe that our diversification efforts and enhanced internal efficiencies should continue to positively impact the remainder of 2017. The global rigid polyol market remains strong. Although competitive activity in North America will persist, the second half of the year should benefit from the partial recovery of higher raw material costs and lower manufacturing costs. Overall, we believe the Company earnings for the year should grow," said F. Quinn Stepan, Jr., Chairman, President and Chief Executive Officer.

Conference Call

Stepan Company will host a conference call to discuss the first quarter results at 10:00 a.m. ET (9:00 a.m. CT) on July 26, 2017. The call can be accessed by phone and webcast. Telephone access will be available by dialing +1 (800) 704-8312, and the webcast can be accessed through the Investor Relations/Conference Calls page at www.stepan.com. A webcast replay of the conference call will be available at the same location shortly after the call.

Supporting Slides

Slides supporting this press release will be made available at www.stepan.com under the Investor Relations center at approximately the same time as this press release is issued.

Corporate Profile

Stepan Company is a major manufacturer of specialty and intermediate chemicals used in a broad range of industries.  Stepan is a leading merchant producer of surfactants, which are the key ingredients in consumer and industrial cleaning compounds.  The Company is also a leading supplier of polyurethane polyols used in the expanding thermal insulation market, and CASE (Coatings, Adhesives, Sealants, and Elastomers) industries.

Headquartered in Northfield, Illinois, Stepan utilizes a network of modern production facilities located in North and South America, Europe and Asia.

The Company's common stock is traded on the New York Stock Exchange (NYSE) under the symbol SCL.  For more information about Stepan Company please visit the Company online at www.stepan.com

Contact: Scott D. Beamer                                                                     (847) 446-7500

* * * * *

 

Tables follow

Certain information in this presentation consists of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). These statements include statements about Stepan Company's plans, objectives, strategies, financial performance and outlook, trends, the amount and timing of future cash distributions, prospects or future events and involve known and unknown risks that are difficult to predict. As a result, Stepan Company's actual financial results, performance, achievements or prospects may differ materially from those expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by the use of words such as "may," "could," "expect," "intend," "plan," "seek," "anticipate," "believe," "estimate," "guidance," "predict," "potential," "continue," "likely," "will," "would," "illustrative" and variations of these terms and similar expressions, or the negative of these terms or similar expressions. Such forward-looking statements are necessarily based upon estimates and assumptions that, while considered reasonable by Stepan Company and its management based on their knowledge and understanding of the business and industry, are inherently uncertain. These statements are not guarantees of future performance, and stockholders should not place undue reliance on forward-looking statements.

There are a number of risks, uncertainties and other important factors, many of which are beyond Stepan Company's control, that could cause actual results to differ materially from the forward-looking statements contained in this news release. Such risks, uncertainties and other important factors include, among other factors, the risks, uncertainties and factors described in Stepan Company's Form 10-K, Form 8-K and Form 10-Q reports and exhibits to those reports, and include (but are not limited to) risks and uncertainties related to disruptions in production or accidents at manufacturing facilities, global competition, volatility of raw material and energy costs, disruptions in transportation or significant changes in transportation costs, reduced demand due to customer product reformulations or new technologies, the probability of future acquisitions and the uncertainties related to the integration of acquired businesses, maintaining and protecting intellectual property rights, international business risks, including currency exchange rate fluctuations, legal restrictions and taxes, our ability to estimate and maintain appropriate levels of recorded liabilities, our debt covenants, our ability to access capital markets, downturns in certain industries and general economic downturns, global political, military, security or other instability, costs related to expansion or other capital projects, interruption or breaches of information technology systems, the costs and other effects of governmental regulation and legal and administrative proceedings and our ability to retain executive management and key personnel.

These forward-looking statements are made only as of the date hereof, and Stepan Company undertakes no obligation to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise.

 

Table I

STEPAN COMPANY
For the Three and Six Months Ended June 30, 2017 and 2016
(Unaudited – in thousands, except per share data)




Three Months Ended

June 30



Six Months Ended

June 30




2017



2016



2017



2016


Net Sales


$

495,101



$

454,603



$

963,370



$

900,500


Cost of Sales



405,135




361,672




781,306




714,070


Gross Profit



89,966




92,931




182,064




186,430


Operating Expenses:

















Selling



13,259




14,572




26,744




28,262


Administrative



17,848




17,692




35,819




36,392


Research, Development and Technical Services



14,296




14,256




27,717




28,038


Deferred Compensation Expense



5,016




2,434




5,392




5,154





50,419




48,954




95,672




97,846



















Business Restructuring



586




1,061




1,372




1,061



















Operating Income



38,961




42,916




85,020




87,523


Other Income (Expense):

















Interest, Net



(2,863)




(3,417)




(5,855)




(7,031)


Other, Net



965




(303)




2,228




(828)





(1,898)




(3,720)




(3,627)




(7,859)



















Income Before Income Taxes



37,063




39,196




81,393




79,664


Provision for Income Taxes *



9,167




10,695




21,585




23,244


Net Income *



27,896




28,501




59,808




56,420


Net Income Attributable to Noncontrolling Interests



(14)




(5)




(13)




(8)


Net Income Attributable to Stepan Company *


$

27,882



$

28,496



$

59,795



$

56,412


Net Income Per Common Share Attributable to Stepan Company

















Basic *


$

1.21



$

1.25



$

2.61



$

2.48


Diluted *


$

1.19



$

1.24



$

2.56



$

2.46


Shares Used to Compute Net Income Per Common

 Share Attributable to Stepan Company

















Basic



22,953




22,760




22,927




22,746


Diluted *



23,381




23,004




23,356




22,950




































* The 2016 amounts for the noted line items have been immaterially changed from the amounts originally reported as a result of the Company's adoption of Accounting Standards Update (ASU) No. 2016-09 Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting in the fourth quarter of 2016.


 

 

Table II

Reconciliation of Non-GAAP Net Income and Earnings per Diluted Share




Three Months Ended

June 30



Six Months Ended

June 30


($ in thousands, except per
share amounts)


2017



EPS



2016



EPS



2017



EPS



2016



EPS


Net Income Reported


$

27,882



$

1.19



$

28,496



$

1.24



$

59,795



$

2.56



$

56,412



$

2.46




































































Deferred Compensation Expense


$

2,538



$

0.11



$

1,419



$

0.06



$

1,737



$

0.07



$

3,240



$

0.14


Business Restructuring


$

473



$

0.02



$

796



$

0.03



$

1,062



$

0.05



$

796



$

0.03



































Adjusted Net Income


$

30,893



$

1.32



$

30,711



$

1.33



$

62,594



$

2.68



$

60,448



$

2.63



* All amounts in this table are presented after-tax


The Company believes that certain measures that are not in accordance with generally accepted accounting principles (GAAP), when presented in conjunction with comparable GAAP measures, are useful for evaluating the Company's operating performance and provide better clarity on significant non-operational items.  Internally, the Company uses this non-GAAP information as an indicator of business performance, and evaluates management's effectiveness with specific reference to these indicators.  These measures should be considered in addition to, neither a substitute for, nor superior to, measures of financial performance prepared in accordance with GAAP.

 

 

Reconciliation of Pre-Tax to After-Tax Adjustments




Three Months Ended

June 30



Six Months Ended

June 30


($ in thousands, except per share amounts)


2017



EPS



2016



EPS



2017



EPS



2016



EPS


Pre-Tax Adjustments

































Deferred Compensation Expense


$

4,094







$

2,289







$

2,801







$

5,226






Business Restructuring


$

586







$

1,061







$

1,372







$

1,061






   Total Pre-Tax Adjustments


$

4,680







$

3,350







$

4,173







$

6,287







































Cumulative Tax Effect on Adjustments


$

(1,669)







$

(1,135)







$

(1,374)







$

(2,251)







































After-Tax Adjustments


$

3,011



$

0.13



$

2,215



$

0.09



$

2,799



$

0.12



$

4,036



$

0.17


 

 

Table III


Deferred Compensation Plan


The full effect of the deferred compensation plan on quarterly pretax income was $4.1 million of expense versus $2.3 million of expense in the prior year. The year to date impact was $2.8 million of expense versus $5.2 million of expense in the prior year.  The accounting for the deferred compensation plan results in operating income when the price of Stepan Company common stock or mutual funds held in the plan fall and expense when they rise.  The Company also recognizes the change in value of mutual funds as investment income or loss.  The quarter end market prices of Stepan Company common stock are as follows:




2017



2016




12/31


9/30


6/30



3/31



12/31



9/30



6/30



3/31


Stepan Company


N/A


N/A


$

87.14



$

78.81



$

81.48



$

72.66



$

59.53



$

55.29































 

The deferred compensation income statement impact is summarized below:




Three Months Ended

June 30



Six Months Ended

June 30


($ in thousands)


2017



2016



2017



2016


Deferred Compensation

















Operating Income (Expense)


$

(5,016)



$

(2,434)



$

(5,392)



$

(5,154)


Other, net – Mutual Fund Gain (Loss)



922




145




2,591




(72)


Total Pretax


$

(4,094)



$

(2,289)



$

(2,801)



$

(5,226)


Total After Tax


$

(2,538)



$

(1,419)



$

(1,737)



$

(3,240)


 

 

Table IV


Effects of Foreign Currency Translation


The Company's foreign subsidiaries transact business and report financial results in their respective local currencies. As a result, foreign subsidiary income statements are translated into U.S. dollars at average foreign exchange rates appropriate for the reporting period. Because foreign exchange rates fluctuate against the U.S. dollar over time, foreign currency translation affects period-to-period comparisons of financial statement items (i.e., because foreign exchange rates fluctuate, similar period-to-period local currency results for a foreign subsidiary may translate into different U.S. dollar results).  Below is a table that presents the impact that foreign currency translation had on the changes in consolidated net sales and various income line items for the three and six month periods ending June 30, 2017 as compared to 2016:


 ($ in millions)


Three Months Ended

June 30



Increase

(Decrease)



(Decrease)

Due to Foreign

Currency

Translation



Six Months Ended

June 30



Increase

(Decrease)



(Decrease)

Due to Foreign

Currency

Translation




2017



2016











2017



2016










Net Sales


$

495.1



$

454.6



$

40.5



$

(4.1)



$

963.4



$

900.5



$

62.9



$

(8.6)


Gross Profit



90.0




92.9



$

(2.9)




(0.3)




182.1




186.4



$

(4.3)




(0.4)


Operating Income



39.0




42.9



$

(3.9)




(0.1)




85.0




87.5



$

(2.5)




(0.1)


Pretax Income



37.1




39.2



$

(2.1)




(0.1)




81.4




79.7



$

1.7




(0.2)



 

 

Table V

Stepan Company
Consolidated Balance Sheets
June 30, 2017 and December 31, 2016




2017

June 30



2016

December 31


ASSETS









Current Assets


$

733,429



$

685,541


Property, Plant & Equipment, Net



587,249




582,714


Other Assets



86,061




85,635


Total Assets


$

1,406,739



$

1,353,890


LIABILITIES AND STOCKHOLDERS' EQUITY









Current Liabilities


$

274,392



$

297,265


Deferred Income Taxes



15,147




12,497


Long-term Debt



283,222




288,859


Other Non-current Liabilities



125,279




119,353


Total Stepan Company Stockholders' Equity



707,341




634,604


Noncontrolling Interest



1,358




1,312


Total Liabilities and Stockholders' Equity


$

1,406,739



$

1,353,890


 

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SOURCE Stepan Company